Ex-gratia payment made voluntarily by an employer out of appreciation for the employee is not taxable

Pune ITAT Rules Ex-Gratia Payment Not Taxable Under Section 17(3)(iii). Tribunal Remands Case for Fresh Consideration on House Property Loss and Deductions

In a significant judgment, the Pune Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that ex-gratia payments made voluntarily by an employer are not taxable under Section 17(3)(iii) of the Income Tax Act, 1961, provided they are not coupled with any legal obligations or conditions. The case, Suhas Jagannath Kanase v. ITO, National e-Assessment Centre, revolved around the taxability of a substantial ex-gratia amount received by the appellant from his former employer, Racold Thermo Private Limited.

The appellant, Suhas Jagannath Kanase, challenged the addition of Rs. 42,11,657/- to his income as undisclosed salary by the revenue authorities. He argued that the amount was a voluntary ex-gratia payment and should not be taxed. The ITAT concurred with this argument, referencing a similar case, Mahadev Vasant Dhangekar v. ACIT, where an identical issue was resolved in favor of the taxpayer.

The Tribunal noted that the payment was made voluntarily by the employer out of appreciation for the employee and was not mandated by any legal duty or obligation. The Tribunal criticized the revenue authorities for not verifying the genuineness of the payment and the employer's letter stating its voluntary nature. The Tribunal emphasized that invoking the provisions of Section 17(3)(iii) without establishing the payment as non-genuine or legally obligated is arbitrary and not legally tenable.

Additionally, the ITAT addressed issues concerning house property loss and deductions under Section 80TTA of the Income Tax Act. These matters were remanded back to the Assessing Officer for fresh consideration, with instructions to provide the appellant a reasonable opportunity to be heard.

However, the appellant's challenge to the initiation of penalty proceedings under Section 270A was dismissed as premature. The ITAT stated that such proceedings cannot be adjudicated at this stage.

This judgment is expected to have a significant impact on similar cases where employees receive voluntary ex-gratia payments from their employers, clarifying the taxability of such payments under the Income Tax Act.

Bottom Line:

Ex-gratia payment made voluntarily by an employer out of appreciation for the employee is not taxable under Section 17(3)(iii) of the Income Tax Act, 1961 if the payment is not coupled with any legal obligation or conditions.

Statutory provision(s): Income Tax Act, 1961 Section 17(3)(iii), Section 80TTA, Section 270A

Suhas Jagannath Kanase v. ITO, National e- Assessment Centre, (ITAT)(Pune Bench "SMC") : Law Finder Doc Id # 2792654